Scotiabank's Rick Waugh: Mistakes hurting public trust in banks

If the economy is to flourish and grow, it is essential for banks to rebuild the trust of consumers that for many institutions was lost in the financial crisis, says the chief executive of the Bank of Nova Scotia.

“The financial system, especially banks, depend on trust, confidence and integrity more than any other market,” Rick Waugh said in an address to business leaders in Toronto on Tuesday. “Consumers must be able to trust their bank with their money. This is the real danger banks face, and the implications go far beyond banks themselves — to the entire payment system.”

However Mr. Waugh acknowledged there are still some players displaying the kind of bad judgment that was a hallmark of the years leading up to the financial crisis when lenders loaded up on risky investments linked to sub-prime mortgages.

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He didn’t name the banks in question, but it was likely a reference to the recent massive trading losses at JPMorgan Chase and UBS AG.

“Quite frankly, it’s frustrating, because these very public errors by a few banks give consumers the impression that all banks have learned nothing from the financial crisis, when in fact, that’s not the case at all.”

Mr. Waugh stressed that despite a small exposure to troubled Wall Street lender Lehman Brothers prior to its collapse in 2008, Scotiabank suffered only minimal losses and ended the year with a profit.

“Those who get risk management right, thrive. Those who don’t, falter,” he said. “Canadian banks have shown that we’ve done extremely well at this.”

Experts say Canadian banks benefited from strong regulation and a unique domestic market where profits from conventional banking businesses are big enough that lenders are not motivated to move aggressively into credit derivatives and other novel sectors that were at the centre of the meltdown that began four years ago.

Risk management “is an art, not a science or a computer model,” he said. “It’s really not that much different than the way many of us approach decisions in our everyday lives.”

The comments come as banks around the world are gearing up to boost liquidity and hold more capital in accordance with new international rules put in place by the Basel Committee on Banking Supervision that will be phased in between the end of next year and 2019.

Regulators are especially concerned about so-called too-big-to-fail banks, or players that have grown so large that their failure would result in significant damage to the global financial system. Last year they unveiled a list of 29 such banks — there were no Canadian institutions — that will require tighter supervision and higher capital levels.

A list of banks deemed too-big-to-fail on a national basis is expected later this year and analysts predict it will include all five of Canada’s big banks.